Tuesday, January 09, 2007

SCOPE: It's Not Just A Mouthwash! It's What You Do When You Used Fixed Pricing!

One of the most common misconceptions people have about using a fixed-price model is that setting a fixed-price is all that you need to do. It is no wonder attorneys worry about how it can be done. In order to be profitable on a fixed-price model, attorneys need to change the way they do business almost entirely. They need to:

1) Define a price
2) Clearly Define and Communicate the Scope of the work
3) Learn to be a project manager by
a) Managing the scope
b) Delegating as appropriate, which requires trust that someone
other than yourself can do some of the work competently
c) Mentoring; and
d) Communicating regularly with the client on progress and strategy;

This blog focuses on Scope because it seems to be the part that attorneys have the hardest time wrapping their brain around. Scoping a project is about working with the client to first understand what they value, how much certainty they want and how much work that certainty includes. Then you can define a scope that is consistent with the clients needs and desires. As a general proposition, professionals are all in a position to give the customer what they want at a fixed price and operate a profitable business. Let me propose one way to look at it that works for us. In scope we consider 3 different types of work:

1) Certainly - Work that will certainly need to be done
2) Likely - Work that may need to be done or is likely
3) Huh? - You don't have a crystal ball after all. Sometimes you simply have no idea if it will need to be done when you scope it out.

A key part of fixed pricing is understanding what kind of peace of mind the client wants. Exemplar sends proposals for work that includes all 3 of the categories above when necessary. We often price work that is certain to be done and clients appreciate the fixed price. We very often include work the is also likely required because clients value the peace of mind of knowing that it will be taken care of at a price certain. Sometimes, we even price projects that include work that falls into the category of "Huh?" This is for clients who want top notch, concierge service with no surprises at all. This selection begins to act like legal insurance at the outer edges. This blog is too short to explain the pricing methods used for the different types of projects and scopes, but I will certainly respond to the basic question of "How can you include 1,2 and 3 and be profitable if you do not know blah blah blah blah?" (Yes, I am making fun of you for asking. . . . unless you were born yesterday then you realize that you are surrounded by high rise buildings that are all owned by the most profitable companies in this country that do exactly that. . . . they sell insurance. . . . and yet you still feel compelled to wonder????) At a macro level, you only have to know liability ranges and probabilities. Keep in mind the following: You do not have to sell a Mercedes for the price of a Buick. How to price projects on a value pricing basis is also beyond the "SCOPE" of this post, but will be coming soon. Just keep in mind that statistical analysis is not necessary for most types of fixed pricing. If you are considering trying out a fixed-price model, start by setting a scope with the client that only includes work that is !) Certain, or 2) VERY likely to need to be done. This will reduce your "perceived" risk while giving the customer the peace of mind that they want and deserve. If you have questions about this please feel free to comment and I will respond.

NOW: Finally you are free from the billable hour on at least one project. Take this project as a golden opportunity to learn project management skills. This is what will improve your profitability or (as you probably think about it . . ) your "effective rate." What does that mean? It means asking yourself who needs to do what, how work can be done more efficiently and effectively. You may well find that good project management gives you the opportunity to get the work done more profitably (at the same end cost to the client), AND increase the perceived value of your services to the client at the VERY SAME TIME! We have certainly done so!


Kent Arnold said...

Awesome, Chris. This is just what I need to get started in revamping my own business practices. I'm still struggling with the ABH (Almighty Billable Hour - Ed Kless' term) but I know that value billing [SCOPE refinement] is the way to go.

Kent Arnold said...

Awesome, Chris. This is just what I need to get started in revamping my own business practices. I am struggling with the ABH (Almighty Billalble Hours - Ed Kless' term) but I wholly endorse the fixed price concept. Scope is the winning (or losing) factor. Thanks for your insights. Looking forward to your future writings.